NPAs in the Indian banking sector and feasibility model of an asset reconstruction company

Abstract

Abstract The NPA levels in the Indian banking sector are increasing significantly but are still under control. The measures to reduce the level of NPAs like Debt Recovery Tribunals Lok Adalat have not been very successful. The legal framework has made recovery and restructuring very difficult. Hence we need an agency like the ARC to address this problem and correct the malady before things go out of control. The main objectives of this project are to understand and study: 1. The reasons for generation of NPAs and estimation of their value in the Indian banking system. 2. The effects of large levels of NPA on the banking system and economy. 3. The effectiveness of various redressed measures used so far such as Lok Adalar and Debt Recovery Tribunal. 4. The recommendations of various committees set up for restructuring the banking sector which have a bearing on an ARC. 5. The NPA problem in East Asian economies namely Korea , Thailand , Indonesia and Malaysia and the use of ARCs to resolve this . 6. In the light of points 1-5 above to study the feasibility of an ARC in India and recommend a structure for the same . The study mainly focused on secondary sources to analyze the success of ARC in countries with similar NPA problems. Research work in the form of RBI working papers data analysis of World Bank and Asian Development Bank reports and various other academic studies on the subject were used to analyze the magnitude of the NPA problem in India and suggest suitable corrective measures like the implementation of the Securitization Act 2002 and formation of ARC were discussed. The study also included an analysis of the problem of NPA s in the East Asian economies during the 90s crisis and the success of ARC in these countries. The framework of ARCs in these countries were also analyzed and used to suggest a suitable structure of ARC in India. From the study we could conclude that the magnitude of the problem in India is not very acute but suitable redressed measures at this time will help us control the NPA problem. A study of the value and number of NPA accounts and an ARC to restructure where all the participating banks have a stake was also suggested . It was also recommended the ARC and the banks should be adequately empowered through the legal framework to solve this problem with minimal interference from the government . Financial instruments like Securitization also need to be made popular in India so that disposal of NPA can be made more effective . The study is limited with respect to suggesting a suitable financing structure for the ARC as there is not enough data to suggest this. We are also not able to predict the success of the Secularization Act as it has some counter effective State laws. We also have not suggested a suitable financial methodology for purchase and disposal of assets by ARC. Further work can be done in the suggesting the exact financial structure of the ARC as well as the methodology of purchase and disposal of assets.